Oportun Financial Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Oportun provides unsecured installment loans to consumers with limited or no traditional credit histories. It completed its IPO on September 30, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $153.9m | $128.5m | $434.8m | $358.6m |
| Net revenue | $114.5m | $102.6m | $315.2m | $339.4m |
| Operating expenses | $100.1m | $73.5m | $262.0m | $204.1m |
| Net income | $10.0m | $20.8m | $38.4m | $98.1m |
| Operating cash flow | — | $167.2m | $100.4m |
Revenue grew 20% in Q3 and 21% year to date, chiefly as average loan balances expanded. Reported net income fell despite revenue growth: fair-value adjustments and charge-offs, higher operating costs, and IPO-related stock compensation affected results. Net decrease in fair value was $24.3m in Q3 and $78.6m for the nine months; the latter included $79.0m of net charge-offs on fair-value loans. The Q3 fair-value measure included a $5.6m net mark-to-market increase, offset by $30.0m of fair-value-loan charge-offs.
Net income attributable to common stockholders was a $27.4m loss in Q3 and zero for the nine months. The Q3 figure reflects a $37.5m allocation to Series G shareholders associated with the IPO conversion; it is not the same as consolidated net income. GAAP diluted EPS was $(6.39) for Q3 and is shown as zero for the nine-month period. Non-GAAP fair-value-pro-forma adjusted net income was $15.3m in Q3 and $35.9m year to date, versus $2.4m and $30.2m, respectively, in 2018.
Portfolio, margins, liquidity and debt
- Q3 originations were $543.5m, up 19%; active customers reached 745,089, up 16% year over year. Managed principal was $2.02bn, up 25%.
- Owned principal was $1.69bn at quarter-end. Fair-value loans were carried at $1.68bn; loans at amortized cost, net, were $69.0m.
- Q3 30-plus-day delinquency was 3.8%, versus 3.5% a year earlier. Annualized net charge-off rate was 8.1%, versus 6.9%; year-to-date rates were 8.0% and 7.1%, respectively.
- Reported operating efficiency was 65.0% for Q3 and 60.2% year to date, versus 57.2% and 56.9%. Fair-value-pro-forma adjusted operating efficiency was 57.9% and 57.0%, respectively. These are company-defined measures.
- Cash and cash equivalents were $154.5m, with restricted cash of $65.9m. Nine-month investing cash outflow was $300.0m and financing inflow was $224.0m; cash and restricted cash increased $91.2m to $220.4m.
- Debt totaled approximately $1.49bn: $1.13bn of asset-backed notes at fair value and $358.8m at amortized cost. The $400m secured facility had no balance outstanding at quarter-end. The company reported compliance with financing covenants. Leverage was 87% of average daily loan principal for Q3.
Material changes and unusual items
- Operating expenses rose 36% in Q3. Personnel expense increased 79%, primarily including higher stock-based compensation; total Q3 stock compensation was $11.2m. The company recognized $7.9m related to performance-based awards in connection with the IPO.
- The IPO raised approximately $60.5m net for the company; selling stockholders also sold shares but those proceeds went to them. Preferred shares converted into common stock, and the company completed a one-for-eleven reverse split in September.
- Customer acquisition cost was $128 in Q3 and $135 for the nine months, up 3% and 11% year over year. Management attributed increases to expansion, staffing and marketing investment.
- The company adopted lease accounting in 2019, recording $39.2m in operating right-of-use assets and $41.8m in lease liabilities at September 30.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided in the filing. Management expects existing cash, operating cash flow and available borrowing capacity to cover anticipated operating and capital needs for at least 12 months. It intends to continue funding growth through securitizations, secured financing and whole-loan sales. Auto lending began on a limited basis in California; credit cards and OportunPath are among products under development. Management notes that first-quarter demand has historically slowed seasonally.
Key risks include rising credit losses and delinquencies, reliance on securitization and loan-sale markets, fair-value estimates based partly on Level 3 assumptions, regulatory limits on consumer-loan pricing, and cybersecurity, model, funding and execution risks. California pricing legislation was scheduled to take effect January 1, 2020; the filing states it expected no impact on current business pricing. An August 2019 incident involved unauthorized access to a limited number of employee email accounts; the investigation continued, with no indication at the time that sensitive information had been accessed.
Legal matters include the Atinar shareholder suit, amended in October 2019 to add a derivative claim and seeking unspecified damages, and the Opportune trademark matter, for which Oportun filed a motion for summary judgment; no trial date was set. The company said it considers both matters without merit and intends to defend them. It reported no subsequent event requiring financial-statement recognition or disclosure through November 13, 2019.
Important facts for investors to verify
- How fair-value loan assumptions and realized charge-offs develop, and how much the reported fair-value effects influence period-to-period earnings.
- Whether delinquency and net charge-off rates continue to rise as the loan portfolio grows.
- Access, pricing and covenant capacity across securitizations, whole-loan sales and the secured facility.
- The full effects of IPO-related stock compensation, dilution and the conversion of preferred shares on per-share results.
- Developments in the Atinar and Opportune legal matters, California lending rules, and the investigation of the email-access incident.